Cryptocurrencies: A mixed bag

Looking to invest in crypto? Vijay Valecha, chief investment officer, Century Financial, shares his outlook on the crypto market, its current volatility and other key trends

What’s your view on cryptocurrency in the current climate and near future? Over the last eight months, Bitcoin and most cryptocurrencies have declined by over 70 per cent on the back of ongoing pessimism in the global risk markets. While significant risk assets, including top-notch US tech stocks, have declined by over 20 per cent on a year-to-date basis, cryptocurrencies have fallen more due to their overall risk-reward profile and associated market volatility. We could probably see some bounce back and recovery queues in the current climate. This is based on the ongoing gains in US equity markets coupled with cryptocurrencies such as Bitcoin and Ethereum holding at major support levels. For instance, Bitcoin is keeping strong so far above the support level of $19,500. Similarly, Ethereum seems to have found some support in the $1,000$1,050 zone.

At the macro level, Bitcoin balances on global crypto exchanges have fallen to the lowest it has been over the last four-year period. This might indicate that more investors are now aiming to hold the crypto for longer terms. Another major factor to look at is the percentage of Bitcoin supply that is in profit. When Bitcoin prices recently dipped below the $ 19,000 level, just 49 per cent of the supply was in profit. Historically, the bear markets have bottomed and consolidated whenever close to between 40-50 per cent of the supply is in profit. The worst sell-off could be behind us, as crypto markets have already discounted the worst possible sell-off wave.

However, it is essential to note that any surprise fall in US equity markets will likely see the crypto space head back even lower.

Inflation and the US Fed rate hike trajectory will continue to dominate and cause market gyrations for a considerable period.

Why are cryptocurrency prices so volatile?

The cryptocurrency market is currently home to more than 20,000 small and large tokens. It also has multiple defunct and no-use case-specific tokens. Volatility is the name of the game when investing in cryptocurrency markets. At its peak, Bitcoin’s daily price moved by more than 15 per cent of its absolute value, and the same applied to Ethereum. One of the primary reasons for high volatility is the mindset of the average investor entering this space. For many, the crypto space represents a quick money-making opportunity where you either enter with a high risk-reward or stay out of it.

What are the challenges faced in the digital assets space?

One of the significant problems that crypto markets face is a lack of regulation. The space lacks complete clarity on who can come out with a cryptocurrency, how much can be invested and the categories of investors that can be covered under different slabs. The latest collapse of the Terra Luna stable coin or even the latest $100m Harmony startup hack is the result of a lack of regulations. The primary reason for this is a limited understanding of the underlying technology and the benefits it can offer. Major global regulators are shying away from this and do not want to take the lead in developing a sound and rational framework for this. Markets are looking up to the US and European markets to initiate some framework in this regard. However, the crypto markets, like the global foreign currency (FX) spot markets, are highly decentralised. While FX spot and derivative transactions come under the purview of the respective central banks, the ambiguity related to how cryptocurrencies are treated continues. And the billion-dollar question that has still not been answered at a unified global level remains: Is crypto a commodity or security?

Any key tips for crypto investors? Investors should be wise enough to understand and consider the worst-case scenario before investing in any upcoming or secondary market crypto sales. Other key tips include looking out for good use casespecific cryptocurrencies with decent market volumes, not falling prey to social media scams and crypto pyramid layer Ponzi schemes, and dealing with regulated/ recognised exchanges and brokers only. Cryptocurrency investors wary of hacking and losing assets in spot markets, can use derivatives instruments like contract for differences and futures contracts.

What are the key trends seen in the GCC markets related to digital assets? Digital assets are now seen as mainstream in the GCC. In Dubai, for instance, the real economy is increasingly amalgamated with the digital economy. From luxury brands to travel and arts, blockchain and crypto adoption is taking place at a rapid pace. Dubai has also taken the lead in creating the Virtual Asset Regulatory Authority. Major global crypto exchanges, including Binance and FTX, have applied to set up shop here. Similarly, Bahrain is also seeing a wave of new investments in the blockchain and digital assets space. For GCC, the realisation of Web 3.0 and its increased adoption will create lots of new jobs and wealth opportunities in this space.